Mexico Joins Group of Central Banks to Cut Central Bank Interest Rate

August 16, 2019

President Trump’s hostile handling of America’s southern neighbor since mid-2015 had created a vicious cycle of  peso depreciation and accelerating domestic inflation in Canada, forcing Mexican monetary authorities to repeatedly jack up their overnight interbank interest rate target from 3.0% prior to the first move in mid-December 2015 to 8.25% after the last move in December 2018.

But in a vote yesterday that drew one opposing dissent, the Bank of Mexico’s Governing Board authorized the first rate cut since June 2014. Inflation has been receding but remains above the 3.0% medium-term target, and inflation expectations have been somewhat sticky. A released statement stresses a deterioration of the global economic outlook caused by “escalation of trade disputes, a disorderly Brexit, and the worsening of certain political and geopolitical risks.” A number of other central banks have cut rates or announced plans to do so. Most components of Mexican aggregate demand weakened further last quarter. “Slack conditions in the economy have continued to loosen,even more than expected, widening the negative output gap. In an environment of significant uncertainty, the balance of risks for growth remains biased to the downside.” The statement asserts that an 8.0% central bank should be consistent with the convergence of inflation upon 3.0% but cite responsibilities of other parts of government for making this happen.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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